Housing Expenses: What is the 30% Rule?

One of the biggest questions people ask about finances is what the 30% rule means for housing. Does it mean net or gross income? Is it just the mortgage plus interest, or does it include other expenses? You might get several different answers. The most generous answer, of course, is that you can “afford” to pay 30% of your gross income on mortgage and interest payments. While you might feel good about this plan, it might not be the safest option. ( You may want to look into Good Credit Score for a Mortgage)

Playing it Safe with Your Housing Expenses

When you play it safe with your finances, you should work off your net income — your take home pay. This means that you should figure your 30% based on the money you bring home. If you really want to play it safe, your 30% should include the following:

  • Principal and interest
  • Property takes
  • Homeowners insurance premiums
  • Mortgage interest premiums
  • Utilities
  • Maintenance

This means, of course, that you might need to reconsider the home that you purchase. A mortgage that puts you right on the line could mean that everything else pushes you over. And, if something unexpected happens, high home costs can be devastating; if you can’t keep up with them, you could lose your home.

One of the reasons that we ended up with a mortgage market crash and a financial crisis back in 2008 was due to too many people taking on more house than they could actually afford. It is important that you carefully consider whether or not you can truly afford your home.

Are You House Poor?

One of the issues that you might run into is being house poor. This means that you spend a great deal of your discretionary income each month on expenses related to your house. Are you spending so much on your home that you can’t afford to enjoy other things in life? This is a very real possibility, and one that can be disheartening.

Unless you really like staying at home, being house poor can cause stress in the relationship. Before you decide on a mortgage, make sure that you consider all of the consequences. You should estimate utilities and maintenance, as well as check with local property tax trends to get an idea of what you are likely to owe in property taxes. Without the right planning, you are likely to find that you are house poor, and barely making ends meet each month. If you follow the 30% rule (better yet, make it 25%) that says ALL of your housing expenses should be less than 30% of your net income, you stand a better chance.

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